Federal Reserve Bank of San Francisco President John Williams said the Fed’s use of the word “patient” to describe its stance on monetary policy represents a “bridge” toward a period of rising interest rates.
The shift “was a natural progression as we begin moving closer to normalizing monetary policy,” Williams said in an interview on Bloomberg Radio with Kathleen Hays and Vonnie Quinn. Policy makers are “getting closer to consider normalizing policy and I consider it a bridge.”
Chair Janet Yellen said this week that the Fed will be “patient” in considering when to raise interest rates for the first time since 2006 and is unlikely to move before the end of April. Her remarks helped propel the best two-day rally in U.S. stock indexes in three years.
The Fed’s patient stance replaced a previous commitment to keep the benchmark interest rate near zero for a “considerable time” and is intended to give policy makers more flexibility to respond to the latest economic data.
Williams, 52, said June 2015 is “a good starting point” for the Fed to start thinking about increasing interest rates.
The San Francisco Fed president said he expects consumer spending and wage growth to improve and he views the drop in oil prices as a positive for the U.S. economy. He said he projects unemployment at about 5.25 percent by the end of 2015.
The jobless rate was 5.8 percent in November, the lowest in six years and close to the range of 5.2 percent to 5.5 percent that officials consider full employment.
Williams, who will vote on the policy-making Federal Open Market Committee in 2015, has never dissented from an FOMC policy statement during eight meetings in 2012, the last time the San Francisco Fed president held a voting seat. He was among the early supporters of open ended-bond purchases by the Fed to boost the economy. The purchase program ended in October.
Williams joined the San Francisco Fed in 2002 and was director of research before being named president in March 2011. He succeeded Yellen as president of the regional Fed bank, one of 12 in the country.
Unemployment has fallen faster than projected, bolstering the views of officials who favor a faster interest-rate increase. At the same time, policy makers urging caution have pointed to an inflation rate that has languished below the Fed’s goal for 30 straight months.
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose 1.4 percent in the year through October. Officials don’t expect to meet their inflation goal until 2016, according to projections released this week.
Most Fed officials expect to raise the benchmark rate next year. At the same time, they lowered their projections for the pace of increases over the next two years from their previous forecasts in September.
The majority of the FOMC believe inflation will gradually rise as slack in the labor market continues to disappear, Yellen said in her Dec. 17 press conference. In the meantime, the committee saw the impact on inflation of lower energy costs as “transitory,” she said.
The net impact on the economy from lower oil will be positive because it gives households more money to spend on other goods and services, Yellen said
“It’s like a tax cut that boosts their spending power,” she said.
While the FOMC has to be “cognizant” of global risks, “they are not really that big a driver for policy right now,” Williams said.
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